November 10


More Profitable Pricing Models

Recent data shows that companies are scared to increase prices, opting instead to achieve more revenue through cost cuts, outsourcing, and innovation. However, Ed Sullivan, a writer for CEO magazine, belives that the benefit of those activities may be diminishing and companies will have to look to other areas for profit increase.

The consultants at Atgenga  surveyed CEOs and found that 82% felt that price was not a high priority. Per Sjofors, president of Atenga, feels that companies are missing out by not raising prices. Many businesses are not aware of what their pricing should actually be or what their customers are willing to pay.

Companies should shift to both optimize pricing and focus on where they can deliver unique benefits. Four components of optimized pricing are:

  1. Identify value opportunities
  2. Choose which ones to prioritize
  3. Align their value and price
  4. Constantly communicate to customers the value being provided

Netflix’s recent price increase is an example of performance pricing. The company chose to raise prices by 40% and eliminate their bundling package, but they will likely hold their customer base due to a deep library of streaming movies and similarly wide selection of DVDs.

Sjofors offers up an example of a company who neglected to take advantage of pricing, instead going with a price decrease from $2,400 to $1,800 in hopes that more customers would foot the deficit. The results of this experiment disappointed, as sales declined 40% the following year because customers associated a lower price with lower quality.

Companies with optimized pricing have been shown to possess twice the growth rate and profitability when compared to other companies, and four to five times higher shareholder value. Being superior to peers with pricing will create a self-reinforcing cycle of growth and profitability.

How have you optimized your company’s prices? What have you seen succeed? What surprised you?

Photo Credit: GotCredit


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